How not to build startup culture in the UK

Recently it’s been announced that Labour are considering raising CGT from 20% to 39% and also plan to scrap the small amount of Entrepreneur’s Tax Relief that remains (particularly because it’s abused fraudulently, too much).

I’ve been feeling really mixed on this. Partially because my left-leaning history should be glad about this…particularly because I’ve said on repeat something to the effect of “as long as capital returns more than labour, inequality is only going to get worse”.

However, with this reality being suggested, I am finding myself not so enthused. I just find myself feeling that this is well intentioned, poorly thought through policy.

This is for a few reason, but a big part comes back to when I first looked into Inheritance Tax for an episode on our podcast (linked here: https://open.spotify.com/episode/5crBLWhSPuMYiYejdDMr1G?si=uwlkQfJHQr6zvNi4t5I-aw).

When I completed this research, I found that I’d moved from being hugely in favour of inheritance tax for a range of practical and moral reasons, to finding myself thinking it should be abolished. This was because of one fundamental shift in my views on tax, following research:

The only thing that matters in tax policy is the outcomes, not your intentions

I realized that the nature of inheritance tax had a few key flaws which meant, purely in terms of outcomes, it was a bad policy . In rough order of importance:

1. It was extremely hard to get the richest to pay it anyway. Like most taxes it disproportionately squeezed the middle who made enough to qualify but not enough for it to make sense to properly avoid it, rather than the people who we really needed to pay it.
   

2. In political terms, it’s a stupid hill to die on because it has a small benefit but incites a lot of hate. People felt really strongly about it (making it a PR nightmare and timesink for the government AND the public) but it actually brought in a very small % of tax income (1-2% of total) and didn’t achieve it’s non-cash aims (avoiding an aristocracy, promoting equality by redistributing wealth from the richest).
   

3. Aside from encouraging avoidance, it also encourages emigration and discourages high value immigration, which is likely a net-cost. The idea of rich people simply opting out of society is infuriating (a la Dyson and INEOS founders, and most any rich sportsperson/movie star who moves to Monaco) but it’s a reality and we can either accept that and plan around it, or end up worse off.
   
   Policy is a realm where we need to be real with ourselves and make tough decisions given the reality we face. There is a certain allowance for making a statement about our values, but with taxes and the economy the majority of us would probably rather be better off rather than feeling overly smug on our moral high-horse - and I say this reluctantly as an over-moralizing lifetime fan of moral high-horses.

So how do I feel about the CGT tax plans?

Now, with the upcoming CGT tax plans, I find myself feeling the same way as I did about inheritance taxes (though emigration/lack of immigration is the main issue and the scale of this tax source matters more than inheritance tax…although the net change may end up being irrelevant given the pros and cons).

I resonate with the principles, but this feels like a poorly planned policy that’s going to end up just hurting more than it helps. What we should be doing is trying to tax idle wealth accumulation as much as possible while balancing this against scaring off these people altogether, not give disincentives for productive investment in this country!

My gut is that we should be raising CGT, yes, but it should probably not be as much as 2x and should be carefully paired with even stronger incentives for productive investment - the carrot to offset the stick.

That means incentives if you’re putting money into UK businesses who will then create jobs (already exists in S/EIS, but should be extended so there is more scope for UK companies to actually compete with US competitors), incentives to go and be the person taking that risk and starting a business (MORE entrepreneur’s tax relief, not less…and if it’s being abused, close the loopholes, not the scheme! Also encourage more funding into the ecosystem by allowing pension funds to invest into VC), and even more incentive to bring british businesses and even foreign ones onto the local stock exchange (lighter regulation, lower costs, more tax incentives for local investment so local citizens have a reason to invest here rather than in a US index fund). Bigger tax rebates for local R&D and Capex that you choose to plow into the local economy, embedding jobs human capital and value here!

There’s a bunch more I’ve not thought about, but you get the idea.

It’s either the above, or finding some other, smarter, ways to tax the wealthy without stinging the already highly taxed middle in this economy.

What do others think?

Plenty think this is a bad move, Like Barney Hussey-Yeo of Cleo.

Others don’t, like Tom Blomfield - he founded Monzo (and almost oversaw me in an internship at GoCardless back in the day…funny story for another time…don’t do investment banking).

Tom makes a fair point, and I also agree with points he made elsewhere about a lack of startup culture here in the UK being a really core issue (could be a whole separate article) but I don’t quite agree with the implication that this CGT change is irrelevant (or that this is something Cali has got right)…a more fundamental discussion of what’s wrong with the UK is below, but 2 minor points specific to this argument.

Firstly, I’m dubious of this view because it’s relatively recent that California got rid of (very generous) tax incentives for entrepreneurs (2021) and that was well after they cemented themselves as world leaders, THE place to be…and since that was dropped in 2021, they’re now seeing a huge brain-drain to Texas and Florida because of preferrable tax systems there.

Secondly, the US tax system is famously very obtuse (do we REALLY think many california founders are paying 38% tax on exit, and not getting around this?) and their economy gives much better incentives to hold for the long-haul (and then you get to take loans against your stock rather than sell, yay), which we do not…how many UK founders are realistically building to a multi-bill IPO/outcome vs an exit?

More fundamentally, why I think this DOES matter for the UK ecosystem.

We are not the winners in the global ecosystem. We were already a disadvantaged location for building a major business, So, we need to give people reasons to come here, not disincentives

Airbnb had a competitor called Crashpadder (UK based). Airbnb bought Crashpadder, and one of the founders stayed as Airbnb’s head of growth until just a few years ago.

This founder was evidently capable since he stuck around so long in a critical role there…so why did the UK company sell rather than compete? This is for a number of reasons (some may be personal, many will be contextual), and again I’ll dig into this phenomenon of the US eating our lunch in a separate article, but we see this story so often and that is fundamentally because the US market has too many ecosystem advantages…density of talent (not that they’re smarter, but more people want to work for tech co’s), capital (leading to multiple-aribtrage making acquisitions of UK companies tantalizing) and a culture that encourages seeking crazy outcomes.

In fact, it’s not just startups, there’s a reason american PE firms are eating our lunch (literally…look up how many high street brands are US PE owned). This is down to this multiple-arbitrage I mentioned…raise 10x more money than possible in europe, at 10x the valuation we can get, then take that money over here and go on a spending spree…easy.

This is all to say that we need to understand that we are at a big disadvantage and the global economy rewards coming first heavily. Since we’re playing catch-up, anyone who runs a business knows this means you need to dig deep and do more than match…give people a reason to choose you! Just matching is not enough and making yourself even less attractive is a nightmare.

We’re an expensive geo, and we have some advantages over Europe but they’re not that big and we are behind the US…why pile on being one of the shittiest tax jurisdictions in the world for founders!?

Not just this, we need to start doing more about the other issues…incentivize working for tech companies (and invigorate our culture, as people like Tom Blomfield are doing) and getting competitive financing into our funding systems (big one, let pension funds into our investment ecosystem).

Entrepreneurs (and the super wealthy) are disproportionately likely to have ties to other parts of the world and are/or be more willing to move if it comes to saving millions

Back to the practical parts of policy, as this section is titled…entrepreneurs (like the ultra-wealthy) are often highly mobile and disproportionately not even from here. In a world where everyone is outsourcing to low cost geo’s and moving to places with lower cost of living and better weather…WHY give people ANOTHER nudge to f off out of here?

The last one was long…I’ll keep this one brief.

After 10 years of uncertainty, this is more uncertainty/chaos (that labour campaigned on NOT continuing)

This is a big one…as we saw with brexit, the one thing worse than bad policy is uncertainty, because it creates a world where people don’t take action because they believe it’s better to delay and see what happens - or even hope everything is reversed.

Introducing this policy means inward investments and exits that were marginal will be delayed while everyone waits to see if this policy will be reversed (either by Labour, or the next government).

On top of that, this speaks to a misunderstanding of our global position, how important investment is to improving our productivity (and hence growth) and doesn’t build confidence that this government will be able to give us the productivity kick we need.

This point is long enough and I’m getting tired.

Ultimately…this tax will be avoided by the people we want to hit and push people out (probably leading to net losses), while primarily stinging the middle, the people who are making a small exit with local service businesses/similar.

Let me know your thoughts (here, linkedin, whatever!)